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Major overhaul looming for ailing Irish banks

Ireland expects to “overcapitalize” its ailing banks and force them to sell more assets or transfer more loans to the country’s “bad bank” as part of an industry overhaul that may see more nationalizations.

DUBLIN/LONDON—Ireland expects to “overcapitalize” its ailing banks and force them to sell more assets or transfer more loans to the country’s “bad bank” as part of an industry overhaul that may see more nationalizations.

Matthew Elderfield, Ireland’s financial regulator, said on Monday capital could be immediately injected into the banks and a “standby contingent capital facility” could be added as a backstop to restore confidence.

Finance Minister Brian Lenihan said intensifying structural reform of the banks is required under an international bailout of up to 90 billion euros ($123 billion, dollar figures U.S.) agreed late on Sunday.

Giving more clarity on what the accord means for banks, he said: “The whole question of seeing ‘are there other assets that can be got off the balance sheets whether by sale or by transfer to NAMA (Ireland’s bad bank),’ that’s on the agenda.”

The aim is to shrink the loan book to ease the funding strain, which has intensified after an exodus of deposits from lenders in the past six months, adding to Irish lenders’ dependence on ECB funding, which has risen to 130 billion euros.

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Dublin said it will carry out more stress tests to determine how much capital banks need.

More than 10 billion euros of capital is expected to be injected into the top lenders, notably Allied Irish Banks, Bank of Ireland and nationalized Anglo Irish, with billions more available, if needed.

Elderfield said existing capital levels were adequate given the most recent data on loan losses, but investors now expected a bigger cushion. “It is clear ... that market expectations on bank capitalization have risen globally,” he said.

The chairman of Anglo Irish said more bank nationalizations were likely following Dublin’s move to seek a bailout.

“It seems to me that there is at least as strong a case for saying that we need to take massive and decisive action quickly to produce at least two viable ongoing banks for the Irish system,” Alan Dukes told a meeting in Dublin.

“And the sooner and the more quickly we do that, the more quickly we will get to a position where we can return towards some kind of normality in our relationship with markets.”

BANK SHARES TUMBLE

Allied Irish could follow Anglo Irish in being fully nationalized, analysts reckon, as any more capital will leave it about 95 percent state-owned.

The implication of the comments by Dukes, a former finance minister, is that some of Ireland’s smaller lenders could be consolidated, including the functioning parts of Anglo.

“I am worried that we will have a kind of slowly-slowly, piece-by-piece change. Whereas what I think we need at this stage is a very strong decisive approach to whatever structuring it is,” Dukes said, adding that “banks with cleaned out balance sheets” were needed for Ireland’s recovery.

Scandal-hit Anglo Irish Bank was nationalized last year after it nearly collapsed from overexposure to the bloated Irish property and construction sectors, and loose lending practices.

Bank of Ireland shares tumbled 20 percent and Allied Irish fell 11 percent as investors gave a cagey response to the threat of further dilution plus deepening political fallout after the bailout.

Other European bank shares fell as the threat of contagion still hung over banks in Portugal and elsewhere.

Lifting the core Tier 1 ratio of the three big banks to 12 percent would cost about 8 billion euros, Reuters calculations show, with most of that set for Allied Irish. Each 1 percentage point rise in ratio would require about 3 billion euros more.

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